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Renewing your health insurance used to be easy. Now it seems to take all year. Your employees seem to be healthy, but your renewal rates disagree. You contact your old consulting firm. Utilization is too high…again. Emergency room visits are too frequent…again. Generic prescription substitution is too low…again. You are told to increase co-pays and raise deductibles to create the necessary “steerage” to help hold down your health care costs. The result? Double-digit premium increases…again. You are reminded of the definition of insanity: doing the same thing over and over again expecting different results.

What other options are there?

By now you’ve heard of “consumer-driven” health care plans. At this time there are two versions showing promise, Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA). They are designed to lower health insurance costs by engaging employees to take a vested interest in their own health care expenses.

There are significant differences between how these plans work. The employer is the owner of the HRA. The more successful HRA plans are designed to allow a portion of the unspent accounts to roll over from year to year as an incentive to the employee not to spend them. There are no requirements for which type of insurance you use with an HRA. The money that is not spent stays with the employer if an employee leaves.

The employee is the owner of their HSA. Both the employer and the employee can fund this account. HSA funds can be used to help offset all medically related expenses including a tremendous number of things that do not count towards the insurance deductible such as dental, vision, and even some over-the-counter medications. In order to establish an HSA the employee must be covered exclusively by a High Deductible Health Plan (HDHP). The federal government has placed specific guidelines for deductibles and out-of-pocket maximums for these plans to be qualified. Since these plans have a higher deductible than most co-pay plans there is usually a significant premium savings. The concept is to place the premium savings in the tax deductible HSA account and use these dollars to pay your smaller expenses at the insurance company’s negotiated PPO discount while maintaining the insurance plan for major expenses. There are now many examples of the premium savings being large enough to cover most or all of the HDHP deductible!

The HSA accounts can be opened through local banks and credit unions. As long as your HSA qualified health insurance plan is effective by December 1st you have until April 15th to deposit up to $2,900 individual or $5800 family into an HSA account for 2008. Account balances roll over year to year. HSAs are the only products that offer triple tax advantages; tax-deductible deposits, tax-free interest earned, and tax-free withdrawals as long as they are spent on qualified medical expenses. Since the employees own their HSA account there is a significant difference in how this money is spent. Imagine your employees all having a vested interest in not spending their health care dollars. This is why self-funded plans tend to benefit most.

The city of Iola, KS is a perfect example. They switched all of their employees to an HSA plan in 2004. Their utilization has decreased substantially which has allowed the city to deposit half of the employee’s individual deductible into their HSA account each year. Employees have embraced the new plan and are seeing their HSA not as an entitlement to be spent but as a retirement account that should be saved whenever possible. The city now has their health insurance costs in check.

The new generation of consultants will need to be focused on educating businesses and their employees offering workshops and educational tools to help employees understand how these plans work.

Here is a list of 5 common mistakes people make when choosing whether to renew their existing health insurance plan (accepting the enormous premium increase) or find a new plan.

Gotcha #5 – “My local hospital was in the network when I first enrolled so I’m sure it’s still on the PPO list”

Don’t bother going back and digging up your PPO (Preferred Provider Organization) directory. That list was actually outdated the day it was printed! Being out-of-network is similar to handing the hospital administrator your checkbook and allowing him to bill you whatever he wants. We have seen 80% or more of the original charges be discounted because the facility was in the PPO network. There are constant fluctuations with physicians and hospitals moving in and out of PPO networks. Today the only way to get real-time PPO participation is to look up the network online. Most insurance cards will show the provider network name or website. When I travel out of town, I print a PPO network for the city I am traveling just to be safe.

Gotcha #4 – “I’ve had the same insurance company for my auto, home, and life. They have always paid well so their health insurance should be fine also.”

We all know the jack-of-all-trades story line. Just because their auto insurance paid for your fender bender doesn’t mean their health insurance will cover a $940 per week prescription drug to fight cancer. You should search for an independent health insurance agent that represents many different insurance companies and is familiar with the pre-existing condition limitations and underwriting criteria. It is difficult for an insurance agent that offers many different lines of insurance to remain up-to-date with the changing health insurance landscape.

Gotcha #3 – “A guy I work with recommended this company. He’s had them for years.”

Ask your friend if he has had any claims, and if so, how big were they. There are many inferior health insurance plans being renewed year after year simply because the insured has never had any real large claim experience. If they are limited benefit plans they have internal limitations that can have severe consequences. Some common health insurance policy limitations are annual maximums for prescription drugs or outpatient treatment (some “saver” plans exclude these altogether!) and daily maximums for chemotherapy, hospital room charges & intensive care. I recommend comprehensive major medical plans that include inpatient, outpatient, physician visits, and outpatient prescription drug coverage. These should all count together towards a large lifetime maximum of at least $2 million (I personally own a $5 million plan).

Gotcha #2 – “My employer group plan has got to be better and less expensive than an individual health insurance policy.”

Not so fast! That depends on how much your employer contributes. Since group health insurance plans require the employer to pay at least half of the employee’s health insurance cost, it is very rare for an employee to be able to purchase an individual plan on their own for less. The additional family members are a different story. Most employers pay little or none of the additional family monthly premium. We often see healthy families paying $500 to $900 per month to get a spouse and/or children covered on the group plan. With HSA qualified plans (Wow! This is the first time I mentioned Health Savings Accounts this whole post!), we can sometimes cut this cost in half leaving the other half to deposit in the HSA. This premium savings can be enough to fully fund the family out-of-pocket maximum within 12 to 24 months!

Gotcha #1 – “The plan with the lowest deductible and lowest co-pays is the best plan!”

If your family had to choose between 2 plans from the same insurance company using the same PPO network, the first plan has a $0 deductible 80/20 co-insurance plan with co-pays for physician visits and prescription drugs at monthly cost of $900, the second plan is an HSA qualified plan with a family calendar year deductible of $5000 and 100% co-insurance that includes all physician visits, prescription drugs, inpatient and outpatient hospital charges at a monthly cost of $450 per month, which would you choose?

Let’s do the math: $900 – $450 = $450 per month premium savings x 12 months = $5400 in premium savings to offset a true “out-of-pocket maximum” of $5000 for the HSA qualified plan. Tough decision here… With the $900 per month plan, you still have to come up with additional money out of your pocket to pay the co-pays and co-insurance. With the HSA plan, you would have the entire deductible available in your HSA within the first year. You should still allocate $900 per month for your health care, but give $450 per month to the insurance company and put the other $450 into yourHSA account. You get a tax deduction for every dollar you deposit. It pays you interest tax free. Withdrawals can be made at any time tax free for eligible medical expenses. There is no other savings vehicle that is tax free at both ends.

The beauty of an HSA is that if you don’t spend your HSA dollars, YOU KEEP IT! Unspent balances roll over year to year (not like an FSA or section 125 which are use-it-or-lose-it).

There are 2 things that still need to be addressed. Let’s call them “pet peeves” that make some people nervous about moving to an HSA…

1. PPO or High Deductible Health Plan

I do not know of any HSA qualified plan available that is not a PPO plan. Every major insurance carrier now offers an HSA qualified plan and therefore their existing PPO networks apply. Many consumers are under the impression that if they switch to an HSA qualified plan, they would no longer get the PPO discounting. This can amount to huge savings.

2. HSAs work only if you are healthy

Since most HSA qualified plans switch to 100% after the deductible is satisfied, the deductible is the full “out-of-pocket maximum”. Traditional co-pay plans will often have co-insurance (80% or 50%) after meeting the deductible and co-pays on top of that. The worst-case scenario can actually cost less for HSA plans than co-pay plans when comparing “out-of-pocket maximums”.

Lastly, despite the resemblence in the above photos, our HSA card holder is a lot easier on the eyes…No offense John.

Why is it that we look at health insurance so much different than any other type of insurance we purchase? Does our auto insurance cover oil changes and windshield wiper blades? Does our homeowners insurance cover our washer/dryer or furnace? Why is it we expect health insurance to cover every minor expense? The problem with our current health insurance system lies in how the services are delivered. What else in our free-enterprise society today is delivered in a “copay” system? Imagine buying a car and paying a $200 copay with someone else paying the rest. Would any of us be driving the same car we are today? Of course not! No wonder health care now consumes over 16% of our total GDP which is 60% more than Americans spend on housing!

With skyrocketing health insurance premiums companies such as Mega Life and Health can easily sell these limited policies to people because they get insurance that includes copays for doctor’s office visits and some prescription drug coverage at a much lower premium than comprehensive major medical plans.

There needs to be a change in vocabulary in order for people to understand how to purchase health insurance. Most comprehensive major medical health insurance plans have 3 moving parts consisting of deductible, coinsurance, and copays. These 3 combine to represent some sort of out-of-pocket maximum that is difficult to understand. Most plans do not even count copays towards this maximum. Those plans should be described as “unlimited” out-of-pocket. Other than the new HSA qualified major medical insurance plans, which are required by IRS guidelines to have maximum out-of-pocket limitations, it can be very difficult to understand how much is covered.

This is why you should consider an HSA qualified comprehensive major medical PPO insurance plan. Once you own a qualified insurance plan you are then allowed to open a triple tax-advantaged (pre-tax deposits, tax-deferred interest earned, and tax-free withdrawals for eligible medical expenses) HSA account. You then pay your smaller bills out of your HSA at the in-network PPO discount while retaining insurance in case of a larger expense. Whatever is left in your HSA account YOU KEEP! The insurance deductible is offset by your HSA so that your total out-of-pocket maximum is usually much lower than it is with traditional plans.

I have read many of Julie Appleby’s writings and she has mentioned HSAs on many occasions. Although most health insurance brokers are hesitant to recommend HSA designs experts are still predicting 10 million HSAs will be in use by 2008. HSAs provide a vested interest in saving health care dollars for possible future expenses, or if we never spend it, keep it to help supplement retirement income (think IRA).

I just wish the people victimized in this article had been given this information.

What Is An HSA?

A Health Savings Account (HSA) is a tax-deductible account to which you can contribute to save for future medical expenses or to pay for any day-to-day, qualified medical expenses permitted under federal tax law...[More]

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